Founding fathers

Why investors are sweating over Peking University graft case


Being questioned: Founder’s CEO Li You

Most Chinese newspapers are put together using a desktop publishing system called Beida Founder. Beida is the Chinese name for Peking University, and Founder is the name of the company founded by that university. In fact, it is China’s biggest university-backed enterprise.

Founder was established in 1986 by Beida professor Wang Xuan, who invented a means for laser phototyping Chinese characters. The innovation was a bestseller and Wang, who died in 2006, is remembered as the modern-day equivalent of Bi Sheng, the Chinese inventor of movable type-printing technology, which he pioneered some 1,000 years ago.

Should Wang have been alive today, however, he would have been dismayed by what the newspapers have been printing about Founder.

The trouble started in early November last year, when property firm Beijing Zenith began making major allegations against Founder executives which included claims of insider trading, money laundering and even links to mafia groups.

“Founder Group’s chairman Wei Xin and its chief executive Li You have been manipulating the group’s companies for years … and embezzled tens of billions of yuan,” one of Zenith’s statements warned. “This has not only hurt shareholders’ interests… but also led to the loss of state-owned assets.”

It is extremely rare for an unheralded private sector company to take on a state goliath. About 70% owned by Beida, Founder has business interests spanning technology, brokerage, real estate, pharmaceuticals and commodity trading. By the end of 2013, the conglomerate employed more than 30,000 staff and had assets worth Rmb96 billion (or $15.6 billion, more than all but four of the endowment funds at American colleges).

Needless to say Founder tried to fight back, dismissing Zenith as a disgruntled former business partner and labelling its accusations as akin to “a martial-arts novel fantasy about nabbing a bad guy”.

Founder reported its accuser to the police, while Zenith made a legal claim seeking Rmb3 billion in compensation related to a brokerage that it sold to Founder in early 2014.

Rumours then spread that the Founder executives were linked with Ling Jihua, vice president of the Chinese People’s Political Consultative Conference and the political fixer for former president Hu Jintao. Ling is currently being investigated by anti-graft officials.

Troubled by the negative publicity, the share prices of Founder’s six listed units all tumbled.

There hasn’t been any official confirmation on Founder’s alleged ties with Ling. But a week after the powerful official’s arrest was made public in December, Founder filed a statement announcing that its own chairman (Wei Xin), its chief executive (Li You), plus a president and vice president from the company had all been detained by authorities to “assist with an investigation”.

At least Rmb1.7 billion of funds were also said to have been frozen in Founder’s bank accounts.

The full story may not become clearer until Ling’s investigation is completed. But what is more immediately obvious is that President Xi Jinping shows no sign of slowing his anti-corruption drive.

If anything the net seems to be widening.

Last week, Ma Jian, one of China’s most senior spymasters was also placed under investigation for “serious disciplinary violation”, a bureaucratese phrase usually used in China to indicate graft. Ma is the vice minister of the Ministry of State Security, which is responsible for gathering intelligence overseas as well as maintaining surveillance of dissidents at home.

Citing unidentified sources, the South China Morning Post reported that the probe into Ma was triggered by the investigation into Founder, and added that Ma is “believed to be close to Li You, who allegedly financed hugely profitable securities trades carried out by one of Ma’s relatives”.

The Financial Times has also reported that Ma has been detained for alleged corruption tied to Ling, as well as the Founder Group.

Founder isn’t the only business empire to become embroiled in Ling’s case. The shares of construction firm Zhejiang Guangsha have been suspended since the first trading day of 2015, for instance, with The Paper, a state news portal, reporting that Guangsha’s founder may have maintained close business ties with Ling’s wife.

Investors in the shipping firm Rongsheng Heavy and the developer Glorious Property were also made to sweat last week after speculation that their biggest shareholder Zhang Zhirong had fled to the US to avoid the investigation related to Ling.

With shares at the two firms taking an immediate dive, both Zhang’s companies were forced to make a quick denial through the stock exchange.

“Mr Zhang does not know the Ling brothers, there has never been any form of connection or business dealings,” the statements read, before confirming that Zhang had remained on Chinese soil.

More firms may need to publish similar denials in the months ahead as the investigation of Ling and his allies continues to unfold.

The corruption cases are proving particularly untimely for the property sector, with developers now experiencing difficult conditions in the debt markets, with investors spooked by Kaisa. The Shenzhen-based company could become the first developer to default on an offshore bond, after its chairman abruptly resigned in December.

It has since emerged that Kaisa is being probed for alleged ties to a local official accused of corruption too (see WiC265). The question being asked in the bond markets? Who might be next?

But beware: plenty of the rumours linking Founder to the Ling investigation are yet to be substantiated. One has Founder serving as a key financier for the Xishan Club, a clandestine group of senior officials and business tycoons linked to Shanxi province (see WiC265). Mere conjecture? How about the reports that Founder’s chief executive Li had gifted Ling’s wife two properties in Japan worth $500 million? This allegation has had its plausibility undermined. After sending a journalist to Tokyo, Century Weekly magazine has just reported that the houses in question are nowhere near the value that has been cited, and that one of them was actually bought by a Chinese investment banker for about Rmb20 million ($3.22 million).

That prompted Hong Kong’s Ming Pao newspaper to warn investors to be cautious in how they react to fresh accusations of graft.

In some cases “insiders” have been spreading unfounded allegations about how disgraced politicians are connected to listed firms and then profiting from the subsequent market moves.

Another problem is that companies with no connection to the graft cases are being caught in the crossfire.

“Investors are now treating all Chinese property firms with suspicion,” The Economist offered as an example. “There is no easy way for companies to prove that they are safe from investigations.”

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